Upcoming Budget- Expectations and Issues Faced by Start Ups

Upcoming Budget- Expectations and Issues Faced by Start Ups

India has the potential to become a global manufacturing hub and as per data, by 2030, it can add to the tune of $500 billion annually to the global level.?

The Indian Start-up ecosystem is the third largest in the global market. Despite Covid-19 pandemic and other challenges, the sector has, in the recent past, seen tremendous growth. This unprecedented growth is expected to continue.?Initiatives like Start-up India & Make in India have accelerated the growth of the ecosystem and impacted almost every sector in India.

?Despite the vice of?repetition, one cannot emphasise enough that the forthcoming Union Budget is very crucial for the economy.?

?The following start-up friendly policies are expected from the eight budget to be announced by the Finance Minister on February 1, 2022:?

1.????Relaxing compliance requirements - To complete the paperwork of the compliance requirements, startups have to waste a lot of time and effort. The government needs to reduce the burden and time of tax compliance to an optimal level.

2.????IPO guidelines - Start-up leaders are now looking to improve their growth trajectory by listing themselves on the public markets. The government has hinted at permitting direct overseas listing, but definite guidelines have yet to be formulated. To open new investment channels, startups need liberal and investor-friendly guidelines.

3.????Ease of raising funds - The government should ensure that start-ups have enough backing to successfully recover and thrive. The industry has vast amounts of untapped potential to generate employment and generate positive inflows. Although the government has relaxed the regulations for startups to claim exemption from angel tax, however, there exist various other issues such as adopting an exception-based approach for applicability of angel tax.

4.????Boost domestic capital participation - The start-up industry is demanding changes in all those regulations that prohibit large institutions from investing in alternative investment funds. This will in turn boost domestic capital participation in India's start-up industry by improving sentiments for other family offices and net-worth individuals to invest in start-ups.

5.????Tax-free gains on new investments - Industry bodies expect the FM to exempt capital gains on new investments, similar to what the UK and US have done. This will minimise the loss to the state exchequer as increased capital flowing into startups will boost job creation.

This budget can resolve the following simple issues for this ecosystem:

1. The ESOP taxation system needs to be simplified and taxation only at the point of sale without any conditions should be allowed irrespective of the entity qualifying as a start-up. The previous year's budget had touched the first incidences of tax i.e., income from salary with TDS thereon, and did not disturb the second incidence of tax i.e., income from capital gains. For a more widespread acceptance and execution, the budget needs to simplify the ESOP policy.?

2. In the case of manufacturing and other entities, unabsorbed depreciation is allowed to be carried forward for an unlimited period. Unabsorbed depreciation means when the business profit is not sufficient to cover even the depreciation expense. The same benefit should be extended to unabsorbed business losses for a start-up.

?Example

Business loss before depreciation Rs. 150 lakhs Depreciation Rs. 80 lakhs. In this case, Rs. 150 lakhs are business loss and Rs. 80 lakhs are unabsorbed depreciation. Hence start-ups should get some provisions to get their losses recovered so there can be a greater chances for their survival after going through a loss.

?3. Tax compliance burden of start-ups should be reduced by giving exemption for tax filings under direct taxes and GST for the first 3 years. Union Minister said that the government is looking to ease the compliance burden for the start-up ecosystem in India and is aiming to give the new-age firms more freedom of operation. The minister said that exemption of angel taxes, self-certification, digitization, and simplification of tax procedures were some of the initiatives which were undertaken by the government to help the start-up community grow. The idea is to remove the compliance burden as much as possible.?

4. Simplified provisions for merger/demerger should be introduced for start-ups. The Ministry of Corporate Affairs (MCA) has notified an amendment to the Companies Amendment Rules, 2016. Fast track merger is a shorter option for a merger between a Holding Company and its wholly-owned subsidiary company and between two or more small companies only. Fast track merger does not require approval from the National Company Law Tribunal (NCLT) as compared to regular mergers and requires the procedure to be followed by the respective transferor & transferee.?

Start-ups are the future of all developing nations like India. One?hopes Budget 2022 will have some announcements towards a supporting framework in this direction.

By Harshdeep Singh, Anushka Dokania, Madhvi Gupta, Suchitra Jha, Ananya Thakur, Shambhavi Sharma.